13 Dec Under Armour’s Shares Slide On Weak Guidance
Under Armour Inc. at its Investor Day on Wednesday introduced the company’s 2023 strategic growth plan that calls for a return to a low double-digit growth rate by 2023. But shares of Under Armour fell $2.32, or 10.5 percent, to $19.80 as the company said it expects only low single-digit revenue growth on average over the next five years, including 3 to 4 percent growth in 2019 as gains overseas offsets flat sales in North America.
Overall, Under Armour provided an overview of its long-term strategy and key initiatives to deliver sustainable, profitable growth and shareholder value.
“Under Armour is designed for resilience and over the past two years, our global team has worked tirelessly to transform our business – operationally, strategically and culturally,” said Under Armour Chairman and CEO Kevin Plank. “With a distinct strategy engineered around a clear, uniquely defined consumer supported by a disciplined go-to-market process and data-driven demand mapping, we have never been more inspired, aligned and capable of achieving our goals.”
“As we execute against our long-term strategy, we remain unwavering in our commitment to protecting and growing the Under Armour brand,” Plank continued. “Led by a strong management team, an accelerated innovation agenda and comprehensive discipline around our commitment to increasing total shareholder return, we look forward to delivering the next chapter in our growth story.”
2023 Strategic Growth Plan
The new 5-year plan is architected around two strategic priorities: protect and perform. The first priority is a continued focus on elevating and protecting the Under Armour brand by taking actions to ensure the ability to consistently deliver what consumers, customers and shareholders expect from the company. This means an accelerated innovation agenda, driving even deeper connections through return-driven demand creation and brand experiences, and utilizing an optimized supply chain model along with improving service levels to keep pace within a dynamically evolving market. Simultaneously, the second priority is performing with balance and working to create greater financial and operational agility across the company’s portfolio of businesses to ensure future growth is repeatable and consistent.
Serving as a foundation to its 5-year strategy are the following core elements:
• Single-minded focus on innovative athletic performance product and experiences.
• Becoming consumer centric by harnessing data science and analytics along with the world’s largest digitally connected health and fitness community to drive engagement, preference and consideration.
• Continuing to elevate investments toward the largest long-term growth opportunities including the company’s international, direct-to-consumer, footwear and women’s businesses.
• Emphasizing digital engagement and conversion, and retail excellence.
• Protecting the brand through selective, optimal and premium wholesale distribution.
• Delivering balanced, sustainable earnings growth through margin expansion, cost efficiencies and investment in strategic growth initiatives to drive consistent shareholder return.
2023 Financial Targets
Reviewing the company’s expected performance against its long-term growth strategy, Chief Financial Officer David Bergman emphasized foundational operating principles set to drive consistent results over the five-year period, “Focusing on sustainable, profitable growth while increasing returns on capital and generating substantial cash will empower our ability to deliver industry-leading innovation, compelling premium consumer experiences and drive toward our targets, while steadily increasing returns to our shareholders.”
• Revenue is expected to return to a low double-digit growth rate by 2023, inclusive of a mid to high single-digit five-year compounded annual growth rate (“CAGR”), driven primarily by the company’s International and Direct-to-Consumer businesses.
• Gross margin is expected to increase approximately 275 to 300 basis points reaching at least 48.0 percent in 2023.
• Annual operating margin is expected to reach a low double-digit percentage rate by 2023.
• Earnings per share is expected to grow at a five-year CAGR of approximately 40 percent.
• Annual cash flow from operations, by 2023, is targeted at approximately $700 million, with a cumulative $2.5 billion in cash flow to be generated between 2019 and 2023.
• Return on invested capital is expected to reach 20 percent by 2023.
Updated Fiscal 2018 Outlook
At the meeting, the company provided the following updates to its previous annual outlook, which was issued October 30:
• Gross margin is now expected to be flat versus the previous expectation of “flat to down slightly” versus 45.1 percent in 2017. Adjusted gross margin is expected to improve 20 to 30 basis points compared to 45.2 percent in 2017 as benefits from product costs and lower planned promotional activity are offset primarily by inventory management actions.
• Operating loss is now expected to be approximately $40 to $55 million versus the previously expected $50 to 55 million loss. On an adjusted basis, operating income is now expected to reach the $160 to $165 million range versus the previous $150 to $165 million range.
• Excluding the impact of the restructuring efforts, adjusted diluted earnings per share is now expected to be $0.21 to $0.22 versus the previous expectation of $0.19 to $0.22.
• Year-end inventory for 2018 is now expected to be down at a mid-single-digit rate versus the previous expectation of flat to down slightly.
Initial Fiscal 2019 Outlook
In addition to updating its 2018 full year outlook that was provided on its October 30 earnings call, the company presented an initial outlook for the full year 2019:
• Revenue is expected to be up approximately 3 to 4 percent reflecting a low double-digit percentage rate increase in the international business and relatively flat results for North America.
• Gross margin is expected to increase approximately 60 to 80 basis points compared to 2018 adjusted gross margin due to channel mix benefits from lower planned sales to the off-price channel and a higher percentage of direct-to-consumer sales along with more favorable product costs due to ongoing supply chain initiatives.
• Operating income is expected to reach $210 million to $230 million.
• Interest and other expensenet is planned at approximately $40 million.
• Effective tax rate is expected to be in the 19 percent to 22 percent range.
• Earnings per share is expected to be in the range of $0.31 to $0.33; and,
• Capital expenditures are planned at approximately $210 million.